Double moral hazard and the energy efficiency gap

Louis-Gaëtan Giraudet and Sébastien Houde
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Sébastien Houde: UMD - University of Maryland [College Park] - University System of Maryland

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Abstract: We investigate how moral hazard problems can cause sub-optimal investment in energy efficiency, a phenomenon known as the energy efficiency gap. We argue that such problems are likely to be important for home energy retrofits, where both the seller and the buyer can take hidden actions. The retrofit contractor may cut on the quality of installation to save costs, while the homeowner may rebound, that is, increase her use of energy services when provided with higher energy efficiency. We first formalize the double moral hazard problem described above and examine how the resulting energy efficiency gap can be reduced through minimum quality standards or energy-savings insurance. We then calibrate the model to the U.S. home insulation market and quantify the deadweight loss. We find that for a large range of market environments, the welfare gains from undoing moral hazard are substantially larger than the costs of quality audits. They are also about one order of magnitude larger than those from internalizing carbon dioxide externalities associated with the use of natural gas for space heating. Moral hazard problems are consistent with homeowners investing with implied discount rates in the 15-35% range. Finally, we find that minimum quality standards outperform energy-savings insurance.

Keywords: Energy efficiency gap; moral hazard; energy-savings insurance; minimum quality standard (search for similar items in EconPapers)
Date: 2014-06-21
New Economics Papers: this item is included in nep-cta, nep-ene and nep-ias
Note: View the original document on HAL open archive server: https://hal.science/hal-01016109v1
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Citations: View citations in EconPapers (8)

Published in 2014

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Related works:
Working Paper: Double Moral Hazard and the Energy Efficiency Gap (2015)
Working Paper: Double moral hazard and the energy efficiency gap (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:ciredw:hal-01016109

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